PPI - what's the deal?

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Friday 19th September 2008

by Bob Bardsley
Know Your Money Editor

When taking out a loan, many Britons may have been offered payment protection insurance (PPI). It's a bit like an extended warranty for your loan - helping to meet the cost of repayments if, for some reason, your finances are interrupted. Sounds like a good deal? On the surface it might be, but the Financial Services Authority (FSA) has been looking into the issue for some time and has found a few areas at which some lenders are at fault.

So what are the potential pitfalls of PPI? And what areas of the sales process has the FSA warned consumers to look out for? Here are a couple of the problems reported by the regulatory body - and its guidance on how to make sure you're not getting ripped off when you're trying to get protected.

Single-premium policies

One of the areas already addressed by the FSA is the issue of single-premium policies. It notes the double sting that these had in their tails - although they should no longer be being offered by lenders or other PPI providers. Typically, a single-premium policy offers to avoid having to make a monthly payment for the insurance premium by buying cover in full at the start of the loan and adding it to the total amount of loan which must be paid back.

But the FSA notes that this means interest is then charged on the cost of the insurance as well as the cost of the loan. What's more, the insurance is charged at the amount you would pay over the full term of the borrowing - meaning you pay too much if you repay your loan early. As a result, the FSA has taken action to prevent single-premium policies from being offered to borrowers and tells consumers that, if they have any existing single-premium policies in place, their insurer should get in touch to change the terms and conditions so they only end up paying for the term of the insurance that they actually use.

Motor loans

It's not just personal loans and credit cards that PPI applies to - the FSA notes that you could find yourself driving off a garage forecourt with a brand new policy to go with your brand new set of wheels. But there should be no need to take out PPI in order to buy a car - the FSA claims that, if a loan is to be approved, it should still be offered even if you refuse to take out PPI from the lender. Indeed, you might be able to get a better policy from a third-party provider than from the company lending you the money for your purchase.

In the case of car loans, the regulator fined five dealers in August after finding failings in their sales processes. They were deemed to have failed to check the suitability of their PPI policies for their customers' needs, with more than 2,000 people put at risk as a result. Director of enforcement Margaret Cole stressed: "Motor retailers that sell PPI have to meet the same standards as the rest of the financial services industry. All firms selling PPI must treat their customers fairly."

Anyone else?

A total fine of £175,000 was levied against the five motor traders deemed to have acted unfairly - but nearly five times as much was fined from Liverpool Victoria for failings in its PPI selling process. More than 60 per cent of the financial services provider's sales calls were found to be non-compliant, the FSA reported in July. The breaches included PPI being automatically added to the cost of a loan without customers being made aware. Anyone who did spot the increased sum was then pressured into keeping the policy in place, the FSA found.

Customers taking advice from Liverpool Victoria over the phone were not given full and clear information about the organisation's PPI, the FSA added, while they were also typically given single-premium policies, putting them at risk of the added cost of paying interest on the premium as described above. The total fine of £840,000 paid by the banking group did not include compensation and, the regulator reveals, would have been 30 per cent higher had it not agreed to pay early in the enforcement process. As a result, the total fine originally intended to be paid stood at £1.2 million.

What can I do?

The FSA's advice may have a familiar tone to it. Consumers are told to read the key policy information given to them by the insurer, paying special attention to any exclusions listed to make sure that they do not have a medical condition or special circumstance that precludes them from getting cover. The regulator stresses that PPI is not usually mandatory - meaning for some people that it could be totally unnecessary.

If you do decide to protect those repayments, the FSA still has some guidance on how to go about it. The basics revolve around the fact that you do not need to take the specific policy offered by your lender - third-party policies may be more favourable. The FSA urges customers to shop around, check online comparison tables for best-buy products and find a PPI insurance policy to meet their unique individual needs. ADNFCR-8000200-ID-18788904-ADNFCR ©